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This three-part article focuses on the asset-based approach to business valuation in family law cases. Part I sets forth background and general considerations, when to apply this method, and some special topics such as the valuation of liabilities and income taxes. Part II, which will appear in the next issue of the AJFL, will discuss the Asset Accumulation (AA) method and include an illustrative example. Part III will concentrate on the Adjusted Net Asset Valuation (ANAV) method and contain several illustrative examples.
GENERAL BACKGROUND
Valuation analysts are often asked to value closely held businesses and professional practices, business ownership interests, and securities for various family law purposes. Often, the marital estate includes either a controlling or a noncontrolling ownership interest in the closely held company or practice. Sometimes, one of the spouses owned a business interest both before and during the term of the marriage. In any event, the valuation of this business interest marital asset is often a contentious issue in a family law dispute.
Although less commonly applied than the income approach or the market approach, the assetbased approach is a generally accepted business valuation approach. The asset-based approach is described in most comprehensive business valuation textbooks. In addition, consideration of the asset-based approach is required by most authoritative business valuation professional standards. For example, professional standards such as the American Institute of Certified Public Accountants (AICPA) Statement on Standards for Valuation Services (SSVS) and the Uniform Standards of Professional Appraisal Practice (USPAP) require the valuation analyst to consider the application of the assetbased approach (in addition to other business valuation approaches). That is to say, such professional standards require the consideration of-but not necessarily the application of-the asset-based approach.
In practice, however, many analysts immediately reject the use of asset-based approach methods in a family law business or practice valuation as being too difficult, too time consuming, too client disruptive, or simply (and without adequate explanation) not applicable to the subject closely held company.
In truth, many analysts do not seriously consider using the asset-based approach in the typical family law business valuation because these analysts are not sufficiently familiar with the generally accepted methods and procedures within this business valuation approach. In addition, many analysts labor under misconceptions about when-and...